How does tolerance for failure impact exploratory and exploitative innovation?

Abstract Prior research highlights tolerance for failure (TFF) at individual or team level, yet how firm‐level TFF shapes exploratory versus exploitative innovation remains underdeveloped. We conceptualize TFF as a stable organizational cultural norm and operationalize it via a firm's governance responses to executive underperformance, specifically, the absence of CEO dismissal or pay cuts following poor financial results. Drawing on organizational control theory, we argue that TFF influences innovation trajectories through intertwined control dynamics and resource allocation. We further examine the moderating roles of two external control forces: qualified foreign institutional investors (QFIIs) and government subsidies. Using a novel firm‐level TFF measure, we find that TFF promotes exploratory innovation while constraining exploitative innovation. Government subsidies mitigate TFF's detrimental effect on exploitation but do not moderate the TFF‐exploration relationship. For firms with heavy QFII holdings, QFIIs attenuate TFF's positive effect on exploration and weaken TFF's negative effect on exploitation. This study advances innovation literature by integrating a refined TFF construct with organizational control theory, clarifying the contingent impacts of failure tolerance on innovation and offering actionable insights for balancing risk‐taking and accountability in R&D management.